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Message: <blockquote data-quote="mmadsen" data-source="post: 5020591" data-attributes="member: 1645">Let my try once more to explain why everyone in publishing and retail is not stupid and lazy and why you aren't paying for two books (in a bad way) when you buy one.I'll explain it with the canonical <a href="http://en.wikipedia.org/wiki/Newsvendor" target="_blank">news boy model</a>, which is analogous to book publishing and selling.Our iconic 1920s news boy -- "Extree!  Extree!  Read all about it!" -- buys newspapers from the publisher and sells them for 10 cents.The publisher spends thousands of dollars paying journalists, editors, etc. and paying to run the presses -- it has high fixed costs -- but once everything's in place, it only costs the publisher, say, one cent to print one more paper than he was already printing.How much should the publisher charge the news boy for papers?  The reasonable, but naive, response is that the newspaper is spending a lot of money to print papers, and the news boy's time is not expensive at all, so the paper should charge him, say, 9 cents per paper.  The news boy then makes  a 10-percent commission.  Not bad.But how many papers does the news boy then buy from the paper?  If he thinks he can sell around 100 copies, he doesn't necessarily buy 100 copies -- not if he's wise.  If he buys a paper he can't sell, he's out 9 cents.  (That is, his cost of overage is 9 cents.)  If he neglects to buy one more paper that he could have sold, he's out one cent of profit.  (That is, his cost of underage is 1 cent.)  So, if he's wise, he'll only buy papers that he's almost guaranteed to sell.  Optimally, he'll buy just enough papers that his last one has a 90-percent chance of selling.So if he thinks he can sell 100±10 papers, he won't buy 100 and risk a 50-50 chance of "eating" that 100th paper; he'll buy 87 and be almost certain to sell the very last one.If the publisher owned the news stand, and the news boy was a paid employee, then the publisher would only charge itself one cent per paper -- its own cost -- and it would maximize profits by distributing 113 papers to the news stand, because even a 10-percent chance of selling another paper is a worthwhile risk -- a one-cent cost to earn 10 cents in revenue.But the publisher does not own the news stand, and it can't stay in business charging independent news boys one cent per paper.  It would never recoup its fixed costs.Instead, the publisher arranges to buy back any unsold papers for, say, 8.9 cents.  (We'll ignore rounding problems.)  Now the news boy's cost of overage is just a tenth of a cent, so he's willing to risk carrying extra papers that have just a 10-percent chance of selling, because it's worth paying a tenth of a cent for a one-in-ten chance at earning a whole cent.Or instead of buying back unsold copies, the publisher could deliver copies on consignment, demand nine cents the next day for each copy that sold and ask for a tenth of a cent for each copy that did not.  Wait, this is sounding familiar...That, by analogy, is why a publisher is willing to distribute more books to retailers than it expects to sell and why it's willing to take them back if they don't sell -- because books have high fixed costs and low variable costs.</blockquote>

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